Though it may seem counterintuitive, too much inventory isn’t good. In fact, the costs of bad inventory can be steep for a business — you could lose both money and time to poor inventory management. In serious cases, you could even lose your business altogether.
Every company, from small businesses to mega-corporations, can be severely negatively impacted by poor inventory management. If you’re in charge of ordering and inventory management for your company, you need to know the effects of bad inventory management and how to avoid it.
What Is Poor Inventory Management?
Because poor inventory management can impact the organizational performance of your business, it’s important to know how to spot the signs of bad inventory management so you can find a solution before the problem worsens. The following are some bad inventory symptoms:
- Lost customers
- High storage costs
- Frequent stockouts
- High inventory costs
- Low inventory turnover
- Imbalanced lead times
- Large amounts of obsolete inventory
- Spreadsheets with errors in data entry
- Significant amounts of working capital
- Shipment errors
Though other factors can lead to these effects, they’re all connected to how you manage your company’s inventory.
5 Costs and Hidden Expenses Caused by Bad Inventory Management
The financial repercussions of bad inventory management show why too much inventory is bad. There are also hidden costs for a business focused on inventory, such as warehousing, loss and product handling. When you understand the costs and hidden expenses caused by bad inventory management, you can regain control of your inventory.
1. Capital Cost
The capital cost is what your business spends on carrying inventory. Both opportunity losses and inventory financing charges are included in the cost for carrying inventory. Easily calculate your total charges for inventory financing by determining either the interest paid for inventory on a line of credit or interest lost on the cash you used to buy inventory. Consequently, your capital cost typically makes up the greatest portion of your carrying costs.
Included in opportunity costs are the opportunities your business missed out on due to money being invested in underperforming or obsolete inventory. When you have an impactful inventory management solution, you can effectively and affordably identify underperforming, overstocked and obsolete inventory.
Once you implement an inventory solution that can identify parts you don’t need in your inventory, you can return parts to vendors or manufacturing sites, reducing the cost of your inventory and freeing up space and cash. With the money you’ve freed up, you can invest in new products, mutual funds or additional staff.
2. Inventory Risk Cost
When you hold inventory, you’ll inevitably face potential costs and risks. It’s always a gamble to carry an unsold product, so if your inventory becomes obsolete or quickly depreciates, you’ll face more pressure to turn over your stock. When you miscalculate the need for an item and your stock turnover is slower than you anticipated, you may carry inventory that has lost part or all of the value. If you have inventory mismanagement, you could dramatically increase your risk cost.
Ultimately, your greatest risk cost is the possibility of your inventory becoming obsolete. The total cost for risk also includes inventory damage and shrinkage. The largest amount of inventory lost is typically due to inventory shrinkage, as businesses can have a difficult time tracking inventory. With an inventory management solution, you can significantly decrease your inventory shrinkage.
3. Storage Space Cost
A business’s storage space costs include all associated expenses paid to rent or buy space for storing inventory. These costs may include:
- Mortgage or rent
- Equipment upkeep
- Janitorial services
- Air conditioning
If you have inventory, you need space to keep it and staff who can place your inventory on a shelf. The type and amount of inventory you have determine how much space you need, along with whether you require specialized storage equipment. Additionally, consider the expense of securing your facility. No matter the quality, a security system will cost money, and your insurance provider may even require that your business secures the inventory.
4. Inventory Service Cost
Included in your inventory service cost is insurance to cover taxes and inventory. While carrying insurance may not seem necessary, your choice of insurance plan could make or break your business. Evaluate your options, particularly the value of your inventory and the available premiums. Be sure to make the following considerations:
- Taxes: While you have to pay taxes, you may be able to decrease how much you need to pay by reducing your total inventory. When it comes to local taxes, you’ll likely need to pay more for a higher level of inventory. As such, effectively managing your stock level can save your business money by lowering your tax rate.
- Risks: Consider whether you’re taking a risk by buying cheaper coverage and whether said risk is worth the lower price.
- Value: Determine whether you want to cover your items at their full replacement cost or their depreciated value, also known as the actual cost value. While the former will come with a higher premium, you’ll also have more coverage.
- Loss: If you believe your inventory is at risk of being stolen or your warehouse is located in an area susceptible to natural disasters, you may want to pay a higher premium for better coverage.
5. Inventory Management Implementation
Depending on the size of your business, you could eliminate thousands of wasted dollars and improve your inventory process with an inventory management solution. This specific solution could save you time searching for parts and managing and replenishing your stockroom. This capability will allow you to use your inventory dollars more effectively.
With a management solution, you can store a greater number and variety of items, ensure items you need are always available, eliminate delays in equipment repairs and get rid of overstock.
Schedule a Demo With Finale Inventory
We can help you avoid the symptoms of bad inventory management. Finale Inventory is a cloud inventory software best for applications that involve warehouse management, multichannel e-commerce and high volume. Our software is flexible, scales with your business and is designed to solve all your inventory needs. We empower our customers to process millions of orders every month. Enjoy the following benefits when you choose Finale Inventory:
- Order management
- Centralized inventory
- Warehouse management
- Multichannel integrations
- Wireless barcode scanning
- Landed costs and inventory accounting